# Macro ch. 6 homework

short run fluctuations in output and employment
recession
the period when output and living standards decline
2007-2009
the Great Recession occurred in
real GDP
a measure of the value of final output produced within a country in one year, adjusted for changing prices
increase
if there is an increase in the level of output, read GDP will
nominal GDP
measures the value of final output produced within a nation in one year, using current prices
Real GDP doesn’t change
Suppose that an economy’s output does not change from one year to the next, but the price level doubles. What happens to real GDP?
Nominal GDP doubles
Suppose that an economy’s output does not change from one year to the next, but the price level doubles. What happens to nominal GDP?
Nominal GDP decreases, while real GDP stays constant
Suppose a small economy produces only HD TV sets. In year 1, 100,000 sets are produce and sold at a price of \$1,200 each. In year 2, 100,000 sets are produced and sold at a price of \$1,000 each. What happens to nominal and real GDP?
inflation
an increase in the overall level of prices in an economy
A decrease in real GDP
Which of the following is most likely to be an indication of higher unemployment?
Will decrease
Suppose a family’s income increases by 5% at the same time that inflation is 6%. Then the family’s living standard:
is a relatively modern phenomenon
Rapid and sustained economic growth of nations:
Output per person necessarily decreases
Suppose that real GDP increases by 5% while the population of a country increases by 7%. Then:
Often not large, perhaps 2% per year
Under modern economic growth, the annual average increase in output per person is:
At most only two to three times higher than living standards in the poorest parts of the world
Before the late 1700’s, living standards in the richest part of the world were:
Adjusting GDP figures for the fact that prices are much lower in some countries than in others
\$48,000
In 2011, output per person in the U.S. was about:
investment
When resources are devoted toward increasing future output
Apple builds a new plant to manufacture iPads
Which of the following is the best example of economic investment?
households
the principal source of savings in an economy
More current investment and more future consumption
Shocks
Situations in which firms expect one thing to happen but then something else happens are called:
Negative supply shock
Sharply rising oil prices are most likely to lead to a:
Negative demand shock
If consumers become pessimistic, the economy is likely to experience a:
Positive supply shock
An increase in worker productivity will lead to a
The economy will respond to demand shocks primarily through changes in output and employment
If prices are “sticky” in the short run, then:
A decrease in unemployment
Because prices are sticky, positive demand shock will lead to:
The firm will increase production to 650 computers per week and charge a price of \$1000
Refer to the graphs above. Suppose a firm is currently producing 500 computers per week and charging a price of \$1000. How will the firm respond to a positive demand shock if prices are inflexible?
The firm will continue to produce 500 computers per week and charge a price of \$600
Refer to the graphs above. Suppose a firm is currently producing 500 computers per week and charging a price of \$1000. How will the firm respond to a negative demand shock if prices are flexible?
The firm’s inventories will increase by 200 computers per week
Refer to the graphs above. Suppose a firm is currently producing 500 computers per week and charging a price of \$1000. What happens to the firm’s inventory of computers if there is a negative demand shock and prices are inflexible?
The actual demand for goods and services ends up being more or less than what firms were expecting
Business cycle fluctuations typically arise because:
Tend to reduce the severity of short-run fluctuations
Inventories held by firms:
Real GDP will likely decrease
Suppose that inventories are rising. We could expect that, in the future:
Firms’ inventories will increase, causing them to cut production. Ultimately, real GDP will decrease and unemployment will increase.
Suppose that prices are sticky in the short-run. Which of the following best describes the economy’s response to a negative demand shock?
Firms’ inventories will decrease, causing them to increase production. Ultimately, real GDP will increase and unemployment will decrease
Suppose that prices are sticky in the short-run. Which of the following best describes the economy’s response to a positive demand shock?
The so-called Great Recession in the U.S.
Was the worst economic downturn since the Great Depression
Government actions to increase the total demand for output in the economy
Economists are sharply divided over how to best fight the Great Recession. The majority of economists favor the “Stimulus Solution,” which involves:
Relying on the invisible hand of the market to reallocate resources, by letting weak firms die out quickly
Economists are sharply divided over how to best fight the Great Recession. A vocal minority of economists favor the “Structural Solution,” arguing that the economy needs to undergo some structural adjustments and:

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